April 24, 2009

When textbook macro pays off

Macroeconomics doesn't get much plaudits around now, but here is a real-life story that should hearten those who think the field is really broken. It concerns Andres Velasco, a distinguished macroeconomist who is currently the minister of finance in Chile, and who also happens to be a good friend, colleague and co-author.

Until the current crisis hit, Chile's economy was booming, fueled in part by high world prices for copper, its leading export. The government's coffers were flush with cash. (Chile's main copper company is state-owned, which may be a surprise to those who think Chile runs on a free-market model!) Students demanded more money for education, civil servants higher salaries, and politicians clamored for more spending on all kinds of social programs.

Being fully aware of Latin America's commodity boom-and-bust-cycles and recognizing that high copper prices were temporary, Velasco stood his ground and decided to do what any good macroeconomist would do: smooth intertemporal consumption by saving most of the copper surplus. He ran up the largest fiscal surpluses Chile has seen in modern times.

This didn't make Velasco very popular. Last November, public sector workers marched in downtown Santiago, burning an effigy of Velasco.

But by the time the financial crisis hit Chile, Velasco (and the Central Bank governor Jose de Gregorio, another fine macroeconomist) had accumulated a war chest equal to a stupendous 30% of GDP.

The price of copper plummeted 52 percent from Sept. 30 to year-end, and Velasco dusted off his checkbook. In the first week of January, he and Bachelet unveiled a $4 billion package of tax cuts and subsidies... Velasco’s stimulus spending, includ[ed] 40,000-peso ($68.41) handouts to 1.7 million poor families...

The surpluses accumulated during the good years has given the Chilean government unusual latitude in responding to the crisis. As a result, the economy is doing much better than its peers. As Bloomberg reports, "the country’s economy is expected to grow 0.1 percent in 2009, as the region contracts 1.5 percent, according to the International Monetary Fund."

And does good economics pay off politically? Eventually, yes. Five months after being burned in effigy, Velasco is currently President Bachelet's most popular minister.

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Federal regulators on Friday will privately begin telling the 19 largest US financial institutions how well they performed in stress
tests to assess their soundness.

Regulators trying to stabilize the financial system also will release the test methodology they used, which could provide clues about which banks may be in trouble - but also could could unwittingly roil the industry.

The results of the stress tests won't be publicly released until May 4.

The slow-motion rollout is intended to blunt market reaction to the news of which banks are healthy, which ones could fail if the recession worsens and which need more money to survive.

News reports, including a confidential outline of the tests first reported by The Associated Press this week, have led analysts to start handicapping which banks could fail. The speculation will intensify with Friday's release of the test methodology.

``I'm worried about the overreaction - people selling every bank short and pulling out all their deposits and hiding their money in the mattress,'' said Scott Talbott, a lobbyist with the Financial Services Roundtable, which represents the biggest financial firms.

Regulators are striving to release enough information about the stress tests to inspire confidence. But they don't want to give analysts so much detail that they can run their own tests on the banks before the official release of results.

Wait, you mean actually doing what Keynes recommended 70 years ago? Saving in the good times to spend in the bad times instead of immediately spending surpluses? My God, it's so crazy that it just might work.

James, according to the CIA World Factbook, Chile had a national debt around 4% of GDP as of 2007. The allchile thread below links to proprietary data, but implies that Chile had no debt as of Oct 2008.

Well I, as a natural resource-cursed citizen, do not fancy much the idea of having to be dependent on whether I am lucky enough to have a good minister and a good central bank governor and so, if a Chilean, I would much more have preferred to receive my quota of those copper revenues and decide on my own what to do about them... or as a minimum minimorum set up a system where those funds are absolutely guaranteed to go into a macroeconomic stabilization fund.

That of having to congratulate ministers for doing what they were supposed to do does not really make me jump in joy... that said... Chileans... count your blessings... you were lucky to have some good folks at the steering wheel...this time at least.

Dear Mr Milan:
You are indeed reading the wrong textbook. Did you notice what has been happening in the real world in the past year? Does your macro textbook have any sensible policy recommendations about what to do? Or does it recommend to sit still and wait until the storm is over?
The fact that the copper company is state-owned is only justified politically, fine. But counter-cyclical fiscal policy (in this case implemented through handouts, which are about the least distortionary option) should be part of any decent macro textbook.
Congrats to Andres Velasco for doing his job well.

It isn't really Macroeconomics which has failed. The relatively simple macroeconomics that Paul Samuelson popularized after WWII worked well enough with self-contained economies facing traditional business cycles. As you point out, it still does, specifically in the case of Chile.
However two things have changed first, we now have a global economy vastly increasing the complexity of economic problems. Second partly because of the first change our institutions to reduce fraud and thereby reduce the size of financial bubbles have broken down. Making international markets transparent is extremly difficult and without some measure of transparency macroeconomic policymakers cannot do their jobs well

To those who were wondering, the surpluses were indeed invested in low risk (and yes, low yield) financial instruments abroad. It has earned a very modest interest rate over the years (in fact, none of it were used to buy subprime related instruments).

@ Per Kurowski
Actually, Velasco pushed and congress approved the Fiscal Responsiability Act which had a "Social and Economic Estabilization Fund". Due to Chile's structural surplus rule (0.5% of GDP), fiscal budgets have to be aligned in a way that in the mid term, by law, Chile has to have a fiscal surplus (it's actually more complicated than that, but I don't have space to go on further).

Equally, it may be true that British GDP will be lower than the government forecasts by the middle of the next decade - credit crunches are much harder to slip away from than the government forecasts. But after the stimulus the economy has received, there should be some growth, broadly corresponding to the shape the Treasury predicts.

The real issue is the evaporation of our economic and political pretensions. The Treasury has been forced to recognise that 5% of Britain's GDP has disappeared forever. Too many industries were dependent upon the crazy world of ever-rising house prices and easy credit; now gone for ever. This means that the path to sustainable public finances is going to be astonishingly painful. We can live with national debt doubling, but it cannot double again.

The numbers are terrifying. Budget deficits, even for Keynesian apostles of deficit finance like me, cannot stay at 12% of GDP, or £175bn, for very long, however justifiable in recession. The problem is that so much economic capacity has permanently disappeared, along with those parts of the economy that used to deliver rich tax revenues; the post-recession economy will only reduce the deficit by a quarter. The rest has got to be found by tax increases or reductions in planned spending.

The United States pledged robust support Saturday for an overhaul of governing power within the International Monetary Fund so key emerging-market nations get more say in how the lender operates.

In a speech to the IMF's steering committee, Treasury Secretary Timothy Geithner also called on the fund to be prepared to offer loans to recapitalize banks or to aid developing countries in rolling over corporate debt.

Geithner's proposals, delivered in a strongly worded address at the IMF's semiannual meeting, are likely to provoke some controversy among the other industralized countries who, with the United States, have long dominated the global lender.

He said, however, it was necessary to retool the IMF to reflect a shift in global economic reality.

"This is essential to strengthening the IMF's legitimacy, ensuring that it remains at the center of the international monetary system and reflects the realities of the 21st century," Geithner said.

Washington's commitment to reform carries special weight because it is the biggest single shareholder within the IMF.

Barack Obama is unhappy with much that preceded his occupation of the White House, and not only his predecessor’s foreign policy, for which he is a serial apologiser. Pre-Obama domestic policy also displeases him: any prosperity the nation enjoyed, he says, was built on a foundation of sand. That, won’t happen again: the trillions of debt he is loading on the nation’s books will enable us to erect our post-recession house on solid rock. Our world will never be the same again.

Of course, it never has been: the march of technology has enabled us to travel faster, age more slowly, entertain ourselves differently, and build air-conditioned homes in the miserably hot south and southwest, and in our nation’s steamy capital. But the president has something more in mind and, with control of both houses of Congress, the power to change the way we live now. Let’s make a few guesses as to where those changes will take us.

Top of the president’s change list is the way we consume energy. He believes our use of carbon-based fuels is causing the globe to heat up, with all the dire consequences conjured up by Al Gore as he sits in the library of his home, probably the largest single consumer of energy of any private residence in America. By one means or another, the president will make the use of oil, natural gas and especially coal so expensive that consumers will be forced to use less energy, and rely more for the energy we do use on costly wind and solar power, paid for with tax-funded subsidies or higher utility bills.

Lady Godiva's legendary ride naked through Coventry was perhaps one of the most effective anti-tax demonstrations in history. Her tyrannical husband, Earl Leofric, had imposed an oppressive tax called the Heregeld to pay for the King’s bodyguard.

After pleading with him to repeal the tax, Leofric replied: "You will have to ride naked through Coventry before I will change my ways". So Godiva took him at his word – after ordering the town to close all their windows and doors, she rode through the town with only her long golden hair as her cover. True to his word, Godiva’s husband repealed the hated tax.

2. 1773: Colonial taxes

The Boston Tea party was not a party, but a demonstration against the unfair taxation of colonies. The British Government gave the British East India Company, an English trade company, far more beneficial tax arrangements than its colonial competitors.

Demonstrators in Boston became particularly fed-up with this, and one night a group of protestors sneaked onboard a docked British East India Company ship and unloaded 45 tons of tea (worth an estimated £10,000 - that is about £953,000 today) into the sea. The event ultimately helped spark the American Revolution and the loss of America to the British Empire.

The current crisis may mean he is about 10 years out – but, still, not a bad prediction for a man who died in 1938.

HousePriceCrash.co.uk was established in October 2003 after its founders predicted “one of the potentially biggest economic boom bust events in living memory” was coming. Its aim, apparently, is to provide a “counterbalance to the huge amounts of positive spin the housing market receives in the main media”.

Whist there is not currently a lot of positive news about the housing market to counter, the site does provide a plethora of information, statistics and forums for those interested in the great house price crash.

He may not have predicted the entire financial meltdown, but he did warn the Government of the possible collapse of Icelandic banks back in July. He said last week: “"Alarm bells were ringing all over about the Icelandic banks and the Treasury must have been blind and deaf not to hear them."

In a written question to the government in July, he asked: "What steps [have] the United Kingdom financial authorities taken to satisfy themselves, independently of the Icelandic financial authorities, of the solvency and stability of Icelandic banks taking deposits in the United Kingdom?”

Lord Davies, for the Government, replied that there was no concern about the liquidity or capital base of Icelandic banks operating in the UK.

The current crisis may mean he is about 10 years out – but, still, not a bad prediction for a man who died in 1938.

HousePriceCrash.co.uk was established in October 2003 after its founders predicted “one of the potentially biggest economic boom bust events in living memory” was coming. Its aim, apparently, is to provide a “counterbalance to the huge amounts of positive spin the housing market receives in the main media”.

Whist there is not currently a lot of positive news about the housing market to counter, the site does provide a plethora of information, statistics and forums for those interested in the great house price crash.

He may not have predicted the entire financial meltdown, but he did warn the Government of the possible collapse of Icelandic banks back in July. He said last week: “"Alarm bells were ringing all over about the Icelandic banks and the Treasury must have been blind and deaf not to hear them."

In a written question to the government in July, he asked: "What steps [have] the United Kingdom financial authorities taken to satisfy themselves, independently of the Icelandic financial authorities, of the solvency and stability of Icelandic banks taking deposits in the United Kingdom?”

Lord Davies, for the Government, replied that there was no concern about the liquidity or capital base of Icelandic banks operating in the UK.

Investing surplus funds in sovereign wealth funds or in foreign bonds says something about the ability of smaller nations to determine their own destiny.

Suppose Chile had invested in seemingly sound instruments as several Arab states have done recently with US-based banks, they would have suffered losses that were not under their control.

What this interdependence shows is that entire concept of money needs to be rethought. Even though gold is no longer the standard, people still think in terms of innate "worth" of commodities. But resources like oil and Chile's own copper have no "natural" value, neither does land nor real estate. Even sound currencies fluctuate 20-30% in as little as a single year.

What this shows is that money is now based upon nothing more than trust. If this is too unreliable for sovereign nations then they will need to come up with a new mechanism.

Gold has failed, fixed exchange rates have failed and constraints on national deficits have failed.

The financial events of recent weeks have filled many of us with shock and panic. Surely no one could have predicted that we would be in this mess? Well, actually, they did. Here are ten people who saw the financial meltdown coming...

Here is a question Mr Cable’s posed to Gordon Brown, then Chancellor, during Treasury Questions back in November 2003: “The growth of the British economy is sustained by consumer spending pinned against record levels of personal debt, which is secured, if at all, against house prices that the Bank of England describes as well above equilibrium level. What action will the Chancellor take on the problem of consumer debt?”

Mr Brown did not answer how he would solve the problem, merely replying that: “We have been right about the prospects for growth in the British economy, and the hon. Gentleman (Mr. Cable) has been wrong.”

In October 2005 Mr Wood wisely declared: "Investors should sell all exposure to the American mortgage securities market." In an interview in 2007, he said: "Some institutions have been behaving like leveraged speculators rather than banks… The UK economy is heading for a sharp shock. It just remains to be seen how bad

Did Nicolas write a comment? We can not forget the role played by Nicolas Eyzaguirre, former minister of finances since 2000 to 2005,who implemented the rule of 1% of superavit fiscal under Lagos administration

In the first quarter of 2008, Deutsche Bank had posted a net loss of 141 million euros, and analysts polled by Dow Jones Newswires had forecast a net profit of 764 million euros this time around.

Bank chairman Josef Ackermann said: "This was a key quarter for Deutsche Bank. Once again we demonstrated our strength, as we have consistently throughout this crisis. "But in this quarter, we also proved our earnings power."

Deutsche Bank is the latest global bank to report solid first quarter results, along with peers such as Bank of America, Goldman Sachs and Credit Suisse, giving a glimmer of hope that the financial crisis could be past the worst.

Softbank, now with about 20.6 million subscribers, controls about 19.2 percent of the nation's market, up 1.1 percentage points from the previous fiscal year. But average sales per user declined for voice calls, while they were up for data transmission.

Losses on investments from the market downturn dragged on its earnings, according to Softbank, which bought British cellular giant Vodafone Group PLC's struggling Japanese operations in 2006.

A major one-time loss related to payments for bonds for its mobile unit as well as a write-off for its optical fiber Internet services, also hurt results, it said.

One business area that performed better than last year was its Internet-related "cultural" businesses such as advertising, Internet shopping and auctions, Softbank said.

Softbank also introduced attractive mobile content such as video of comedy acts popular in Japan called "S-1 Battle," and easy-to-use applications called "mobile widget."

For the fiscal year ending March 31, Softbank's profit dropped 60.3 percent to 43.2 billion yen, on 2.67 trillion yen in sales, down 3.7 percent on year.

Softbank did not give a net profit forecast, but expects operating profit for the fiscal year ending March 31, 2010, to rise 17 percent from the fiscal year just ended to 420 billion yen.

The investment, which is for primary as well as secondary shares, involves both the company (IPVG) and one of the principal shareholders (ELITE).

The agreement also provides that IPVG shall issue to GEM or to GEM’s order, one or more warrant(s) to subscribe for up to 30 million shares.

The funding will be used for IPVG’s future business activities and engagements, and for the expansion of its operating subsidiaries.

IPVG CEO Enrique Gonzalez said the investment provides IPVG financing for expansion and for the organic capital requirements of our business subsidiaries. We welcome GEM’s entry into our company as they bring with them a strong track record in private equity and capital markets from their investment activities around the world.

“Despite a challenging global macro environment, this deal is evidence that well run companies can attract smart capital,” Gonzalez closes.

The GEM Group, comprising GEM Investment Advisors Inc. and GEM Global Yield Fund Limited and their affiliates, which was founded in 1991, is a $2.7 billion alternative investment firm engaged in the management of a diverse set of investment tools centered on emerging markets all over the world.

The long awaited 2009 Investment Priorities Plan (IPP) that lists business projects qualified for tax incentives from the government remains unsigned nearly after a quarter has passed into the year earning howls of frustration from the business sector which is currently reeling from a global recession.

The Board of Investments (BoI) expected Malacañang’s approval of the yearly list by the end of last month but petitions from various sectors for changes in the list that Malacañang ordered to be heard delayed its signing, Trade and Industry Secretary Peter Favila said.

Favila said the BoI had to conduct new hearings for the late petitions despite the BoI completing all public hearings along with involved government agencies on the list as early as February this year.

“The IPP has been completed and the President has to sign it,” Favila said.

Favila, however, declined to explain what specific areas of the draft IPP were changed during the Malacañang-initiated hearings.

Favila was also asked if the President will sign the IPP before she leaves for Egypt today but he quipped “I do not ask the President for commitment.”

Initially, the BoI said the 2009 IPP focuses on the granting of incentives to all domestic micro, small and medium enterprises that would include the smallest type of projects such as sari-sari stores and three-wheel vehicles operators.

The scheme is part of plans drafted by the BoI along with other government agencies in line with a directive from the Arroyo administration to safeguard jobs and attract investments while the country suffers from the effects of the global financial slowdown.

BoI managing head and Trade Undersecretary Elmer Hernandez earlier said the new IPP may include new types of incentives that are still in the process of discussions by the IPP inter-agency committee.

The Asian Development Bank (ADB) board has agreed to triple its capital base to $165 billion to cope with the financial crisis, the bank
said on Thursday. This would ensure "much-needed resources to respond to the global economic crisis and to the longer-term development needs of the Asia and the Pacific region," the bank said in a statement.

An "overwhelming majority" of the ADB's 67 countries approved the multilateral institution's fifth general capital increase in its 42-year history on yesterday, the statement said.

"This substantial increase is a resounding vote of confidence from our shareholders for what we can achieve as a premier development partner in the region," ADB president Haruhiko Kuroda was quoted as saying.

Last year, the City welcomed a projected 382,000 visitors, a 20% increase over the previous year. Spanish visitors collectively spent an estimated $389 million in 2008. Travelers from Spain stay on average more than six nights and enjoy shopping and dining out as their top two activities. 84% who visit New York City come for leisure purposes and 84% stay in hotels.

“Currently, Madrid ’s tourism promotion office has an institutional agreement with NYC & Company to grow the image of both destinations,” said Pablo Bautista, CEO of the Madrid Tourist Board. “This exchange between both cities’ tourism offices started last year in New York City with the presence of the City of Madrid in a campaign that promoted its cultural and tourist attractions.”

Bautista has underlined the importance of such a cooperation between New York and Madrid and has mentioned that "there is a strong intention to reinforce in the future these agreements between both cities that will create new joint initiatives".

The New York City ads appear on street furniture throughout Spain in cities such as Madrid, Bilbao , Barcelona, Sevilla, and more. The posters promote the City’s new Real Deal promotion (nycgo.com/realdeal), which offers discounts at the City’s hotels, attractions, cultural organizations, shows, tours, and more; and the new Rainbow Pilgrimage campaign (nycgo.com/gay), a yearlong initiative to boost gay travel to New York City in 2009 during the 40th-anniversary year of the Stonewall Rebellion, the birthplace of the modern Gay Rights Movement. The ads launched on April 20 and will be in place until early June.

As part of the promotion, Viva Tours is offering Spanish consumers a five-day package from 749 euros, which includes air, hotel and transfers from Spain to New York City. The prices are valid through June 19. Viva Tours travel packages can be booked by Spanish consumers through a local travel agent.

“As the leading tour operator of the Spanish market in America, and particularly in New York, this agreement with NYC & Company represents a unique opportunity to reinforce our most important international destination,” said Enrique Martin-Ambrosio, General Manager of Viva Tours. “At this time, we are managing approximately 30% of the holiday packages that Spaniards are contracting to the United States, thanks to the exclusive agreements we have with the airline Iberia, which has an extensive presence in America . Furthermore, Iberia has two daily direct flights to New York City from Madrid as well as another one from Barcelona. We hope that alliances such as this one presented today will help us to increase this quota, increasing our leadership.”

Europeans are notoriously quick to take to the streets to defend their economic interests. Yet, as the Continent endures its worst economic crisis since the end of World War II, things seem unusually calm.

Even Friday's May Day marches were more muted than expected. Though hundreds of thousands of people across Europe took part in the annual demonstrations, calling on governments to support jobs and workers, overall participation was less than unions had hoped for, considering the severity of the downturn.

Exact reasons for the subdued mood vary from country to country, but a common theme emerges: The very factors that make some European economies sluggish and inflexible during times of plenty also help cushion the impact of the downturn.

Spain exemplifies this. During the good times, its economy is held back by low productivity, an extensive underground economy and scant labor mobility. Studies show that Spaniards are unusually reluctant to move away from their home region -- a trait that acts as a drag on the economy.

Today, however, being close to one's extended family is a lifeline. Members of Spanish families help one another pay the mortgage, so there are fewer foreclosures. Even when they lose their homes, Spaniards rarely end up on the street. For the most part, they move in together.

"The family represents kind of a social-welfare network that allows the country to withstand a much higher rate of unemployment," says Rafael Doménech, chief economist for Spain and Europe at BBVA bank.

Then there is the question of who would lead any unrest. The huge job losses in Spain have been borne almost entirely by temporary workers -- women, immigrants and the young -- who aren't represented by anyone. The types of workers who tend to belong to labor unions -- middle-aged men on full-time contracts -- have scarcely been touched by layoffs. In fact, the latest jobs report showed they had slightly increased their number in the first quarter of the year -- even as 800,000 temporary and self-employed workers lost their jobs.

Another issue Spain shares with other southern European countries is its extensive black economy. During the good times, economists have encouraged countries like Spain and Italy to bring the black market under control. In the bad times, however, that market can give many Spaniards secret, undeclared sources of income that can keep them afloat.Analysts say it could represent as much as one-fifth of the Spanish economy, providing work for people who are formally unemployed.

The European Union said Monday that the recession will last at least six months longer than it originally thought, and predicted a 4% contraction for the EU economy, more than double its earlier forecast.

The commission in January forecast the economy of the 27-state bloc would shrink 1.8% in 2009 while that of the 16 countries that use the euro would contract 1.9%. Both the EU and euro-zone economies are now expected to contract by 4% this year, with unemployment and fiscal strains hindering a recovery.

The more-pessimistic outlook lines up with the International Monetary Fund forecast, published in April, that the EU economy will contract 4% this year.

"The European economy is in the midst of its deepest and most widespread recession in the post-war era," European Commissioner for Economic and Monetary Affairs Joaquín Almunia said in a statement. Mr. Almunia added that he saw signs -- such as slight gains in the euro-zone purchasing managers' index -- that the downturn is bottoming out.

The commission's forecasts indicate the EU likely will recover more slowly than the U.S. and Japan, where economists say they expect a slight rebound toward the end of the year, and economic growth in 2010.

The commission, which is the EU's executive arm, now expects slight growth in gross domestic product will return in the second half of 2010 -- a good half-year later than it forecast earlier. It also predicts euro-zone nations will post much wider fiscal deficits through 2010.

The commission doesn't predict beyond next year, but many economists say the widening deficits may persist well after 2010, even if a recovery is under way.

Ireland and Germany are expected to be the worst-performing economies in the euro zone. The commission predicts Ireland's economy will shrink 9% this year while Germany's will contract 5.4%.

German policy makers have become guarded in their forecasts. "From today's perspective, I don't expect positive growth rates before the second half of next year," said Bundesbank President Axel Weber at a speech in Frankfurt Monday. Underscoring the gloom, German retail sales fell 1.0% in March from February and 1.5% from March 2008, the German statistics office said Monday.

Efforts to reverse the economic slide, such as stimulus spending, interest-rate cuts and plans to clean up banks' balance sheets, should help the EU and euro-zone economies to recover next year, the commission said.

EU policymakers remain unpersuaded about whether they need -- or can afford -- further stimulus spending. Mr. Almunia said the bloc might discuss more spending in June, but several finance ministers, meeting in Brussels Monday, said they first want to see the effects of the €200 billion ($265.51 billion) plan they agreed to in December.

But there are at least three other parallels between Mr. Obama and Mr. Trudeau: First, both have been hailed as healers of national rifts - Mr. Obama, between black and white, being both; and Mr. Trudeau, between Canada's two solitudes, French and English, being both.

Second, both Mr. Obama and Mr. Trudeau used classical rhetoric to win audiences over to their plans. In this, both leaders took advantage of North Americans' astonishing ignorance of rhetorical techniques, which makes North American residents peculiarly vulnerable to structured language's hypnotic power.

(As an aside: In the 1980s, when I was research director on Bay Street, I had all my analysts take a simple course on rhetorical delivery, both written and spoken; and in one firm all six analysts became ranked No. 1 in their fields.)

Finally, the third similarity: Mr. Obama is, and Mr. Trudeau was, essentially a liberal activist who, using rhetorical techniques, centralized power. In the case of Mr. Trudeau, it cost Canada some economic wealth and alienated the West; in the case of Mr. Obama, the cost is only beginning. When the president of the largest mercantile power on earth effectively says the sanctity of contracts is not for the courts to uphold, and the mesmerized populace (and media) meekly assent, all commercial contracts thereby become devalued, and the market for such contracts - for what are stocks and bonds but that? - must eventually tank.

I'll therefore repeat what this column noted on Feb. 28: The market, just like in 1938, would likely stage a 40- to 50-per-cent rebound from the then-6,600 Dow's fair-value level, before likely going into a two-year funk. The rebound is two-thirds there, and you can forget the "likely": Mr. Obama just ensured the funk would be upon us before year-end.

From here on, the Dow could rise another 1,000 to 1,200 points - say about 15 per cent more. Enjoy it, but don't get taken by Mr. Obama's hypnotizing rhetoric. I'd use the last few hundred Dow points to lighten up. And if you own non-government bonds, be equally wary, because Mr. Obama will have no compunction taking your money and handing it to the unions that helped elect him. Can you hear the bell ringing?

A growing number of banks are eyeing quick repayment of US government capital injections after stress tests showed major lenders are healthy enough to manage without public support.

Goldman Sachs, Morgan Stanley, Bank of America and others said they would seek early reimbursement of the capital aid injections that began last year to shore up the US financial system.

Others, notably Citigroup, may improve capital ratios by converting some of the government preferred shares to common stock, which will make the US Treasury a large stakeholder.

The Treasury has injected roughly $200 billion (R1.6 trillion) in capital into dozens of banks out of a total programme commitment for $250bn within the Capital Purchase Program and Troubled Asset Relief Program (Tarp).

Some banks had argued that the capital programme was forced on them and had imposed conditions such as limits on executive compensation. They raised fears about the state meddling in bank operations.

"These (stress test) results produced a collective sigh of relief heard around the world," said Patrick O'Hare at research firm Briefing.com.

"It has been the market's conclusion that these collective results are much less worrisome than had been thought weeks ago. Accordingly, it is now envisioning a new phase for the banks in which they start earning their way out of the Tarp halfway house in which they now reside."

The review by regulators showed that 10 big US banks need $74.6bn in extra capital buffers.

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